Confused about media reports simultaneously praising blockchain projects and deriding cryptocurrencies? Not sure what all the fuss is about? Let’s shine a light on some of the basics, common misconceptions, and why any of this matters.
Blockchain was born in 2009. A nine-page paper laid out a new form of electronic cash, Bitcoin. The document describes how blocks of transactions are cryptographically chained together producing a decentralized ledger. The noun blockchain was only later adapted. The paper’s anonymous author builds on discoveries in computer science, cryptography and distributed systems as far back as the 1970’s. Blockchain didn’t appear out of thin air then but was revolutionary for solving the “double spend” problem. For the first time ever, after many failed attempts, an unreplicable digital asset was created. A Bitcoin cannot be copied, unlike movies, books and music files.
As a result, a new crypto-economy has arisen, which some hope and some fear will replace the mighty dollar and the banks. Cooler heads generally see it as a welcome addition to the current system that gives people a choice, hedges reckless money printing, and diversifies financial markets, making them more robust.
Bitcoin, of course, is no longer alone and today there are around 900 distinct chains, each with their own use cases and unique attributes. The most well-known are platform chains like Ethereum, Cardano, NEO and EOS which crowdfunded an astonishing $4 billion. Platform chains can be used by organizations, startups and individuals to build dApps (decentralized apps). Others focus on anonymous payments, supply chain, Internet of Things, gaming, etc.
What these public blockchains have in common is that they have transparent ledgers, and are based on open source code and permission-less access. The code is freely available and can be forked into a new chain with different characteristics. A famous fork is Bitcoin Cash. Its community argues that Bitcoin’s original objective of creating electronic cash is compromised by hardcoded constraints turning Bitcoin into a speculative asset. The Bitcoin community counters that it remains the reserve currency of the new crypto-economy and is working hard on innovations that will make transactions cheaper and faster again. We needn’t be concerned by this rivalry but suffice it to say that blockchains are not set in stone. Elaborate governance models have been developed to allow for innovative code modifications or additions.
But what of government and companies that are not comfortable with cryptocurrency but do like aspects of the technology? Well, you can strip a chain of its coin and still preserve some of the decentralization that blockchains provide. Enter the private or permissioned blockchain: a decentralized database with rights to modify or even read data restricted to authorized users.
These permissioned blockchains are considered completely anathematic by blockchain purists, who regard these BINOs (Blockchain in Name Only) as a ploy by tech companies to sell their old database software in a new jacket and/or as a last effort by the now obsolete banks to stay relevant.
Well, who’s right? The freedom seeking masses or the “blockchain not bitcoin” institutions? Things in the real world are seldom black and white and blockchain is no exception. Amber Baldet – ex-blockchain chief at JPMorgan, now an entrepreneur – pragmatically points out that data has to reside where it makes most sense. Depending on the problem at hand, that can be in the public or private domain. Private blockchains do have a number of distinct advantages: they outperform public chains on speed, privacy, and transaction costs because the code resides on only a few machines that are well-connected and have a simple consensus model. Importantly, they also allow making changes to the rules of the blockchain and reverting data entries. Imagine a government department that wants to use a blockchain for registering land registries. They would need to be able to revert fraudulent title deeds entered onto the blockchain, not accept them forever recorded as truth.
These are very powerful reasons for companies to adopt a private blockchain. However, even for companies and institutions the public chains have a lot to offer. Like the international waters to the maritime trade, the public chains are in fact essential. Public blockchains are open, benefit from network effects, and have the potential to become global standards. Like Voice over Internet Protocol (VoIP), we can expect MoIP (M for Money) to emerge because digital information can be more efficiently and securely exchanged on a shared public chain. Most data will still reside on private databases but thumb prints can be recorded onto public chains for efficient exchange and additional security.
The current internet is a chaotic network of networks and likewise a new blockchain-enabled Internet of Value will emerge as private, public and hybrid networks connect together via cross-chain exchange layers. The hope is that decentralization will disrupt the all-powerful tech giants that entrench themselves ever deeper into our lives. From the current chaos, that may seem terribly naive but change does happen.
Hundreds of thousands of engineers are working on the foundations of the Internet of Value, whilst economists, regulators, CEOs, investors and journalists are figuring out its implications and potential. Fortunes will be made and fortunes will be lost in the process, but anyone can start learning and contribute to blockchaining a better future.
Manuel Rensink is a partner at Swiss digital asset exchange Lykke and lives in Dubai. He works closely with regulators, issuers, and investors. Previously, he led index firm MSCI in Dubai and JPMorgan spin-off RiskMetrics Group in London.
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